Eagerly-Awaited IRS Guidance Addresses Catch-Up Contributions under SECURE 2.0:

The SECURE 2.0 Act of 2022 (“SECURE 2.0”) provided several new rules for age 50 catch-up contributions. Under one SECURE 2.0 section, if a 401(k), 403(b), or governmental 457(b) plan participant’s wages from the plan sponsor for the preceding calendar year exceeded $145,000 (adjusted for inflation), then his or her catch-up contributions for the current year must be made on a Roth basis. Also, for plans subject to that rule, participants who earn $145,000 or less (adjusted for inflation) must be allowed to make catch-ups in Roth form.

Those rules apply to tax years beginning after December 31, 2023. However, retirement plan service providers have expressed concern to the IRS that they might not be able to complete the extensive programming required to comply with those rules by the deadline. Plan sponsors have also expressed concern that their payroll systems might not be updated by the deadline.

To address those concerns, on August 25, 2023, the IRS published Notice 2023-62 (the “Notice”). The Notice provides an “administrative transition period” that “is intended to facilitate an orderly transition for compliance” with the rules discussed above. Specifically, the first two taxable years beginning after December 31, 2023 will be regarded as an administrative transition period with respect to the SECURE 2.0 requirement that catch-up contributions made on behalf of certain eligible participants must be designated as Roth contributions. Until taxable years beginning after December 31, 2025:

• Those catch-up contributions will be treated as satisfying the rules, even if such contributions are not actually designated as Roth contributions; and
• A plan that does not provide for designated Roth contributions will be treated as satisfying the requirement that any eligible participant must be allowed to make catch-up contributions as designated Roth contributions (if the plan is subject to the rule that catch-up contributions made on behalf of certain eligible participants must be designated as Roth contributions).   
  
  

The Notice also addresses a drafting error in SECURE 2.0, which technically eliminated plans’ ability to permit any age-based catch-up contributions as of January 1, 2024. The Notice states that even though that drafting error occurred, plans can allow age-based catch-up contributions after December 31, 2023.